Operating Cash Flow (OCF)
Net cash generated from the core business operations before investing or financing activities
What is Operating Cash Flow (OCF)?
Operating cash flow is the cash generated by a business's normal operations. It starts from profit and adjusts for non-cash items and changes in working capital.
It shows whether the core business produces cash, which profit alone does not always reveal.
How this KPI is measured
- Function
- Finance
- Sub-function
- Cash Flow Management
- Industry
- All Industries
- Type
- Lagging
- Impact
- Financial control
- Unit
- $
- Measurement frequency
- Monthly / Quarterly
- Formula
- Net income + Non-cash items (depreciation/amortisation) ± Changes in working capital
How to calculate it
Start with net income, add non-cash items such as depreciation and amortisation, and adjust for changes in working capital.
For example, with net income of 3,000,000, depreciation of 1,000,000 and an increase in working capital of 500,000, operating cash flow is 3,000,000 + 1,000,000 - 500,000 = 3,500,000.
An increase in receivables or inventory reduces cash flow, and an increase in payables raises it.
Where it is used
Testing earnings quality
Check profit turns into cash.
Planning funding
Understand cash generation.
Assessing sustainability
See if operations fund themselves.
How to improve it
Tips and common mistakes
- A profitable business can still run out of cash.
- Large gaps between profit and cash need explaining.
- Follow the accounting standard for classification.
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